A feeling of uncertainty lingers among investors ahead of the political transformation Myanmar is undergoing. The 2015 elections, the first contested vote after a civilian government put an end to 50 years of military rule in 2011, saw a landslide victory for the National League for Democracy, led by Nobel Peace Prize winner Aung San Suu Kyi, and was hailed as a landmark moment in the country’s recent history.

The new government made a number of key reforms straight after taking office in March 2016, and even prompted the end of US trade sanctions, but it has yet to win hearts and minds of the business community: investors are hitting the brakes waiting for a quickly changing regulatory landscape to crystallise.

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“Ask anybody in this room. Nobody has a clue on the new investment rules,” one US investor commented on the sidelines of a Myanmar business forum in London in November 2016.

The waiting game

A new investment law approved in October 2016 is supposed to make it easier for local and international investors to develop projects – Myanmar is behind only the Philippines and China for barriers to foreign investment, according to OECD figures – but its implementation is still in progress. That leaves investors in an uncomfortable limbo between the accommodating incentives introduced by the civilian government between 2011 and 2016, which are being phased out, and new investment rules, the details of which have yet to be finalised.

Besides, a number of other antiquated laws and regulations are in being updated, including a companies’ law that dates back to 1914. Long thought necessary, this regulatory overhaul has nevertheless created doubt and uncertainty, at least in the short term, making investors cautious.

“Investment is a bit slow this year because investors are in a wait-and-see mode,” says U Aung Naing Oo, secretary of the Myanmar Investment Commission (MIC). “This is a very new government and they want to understand more about its economic policies.”

A level playing field?

The new investment law distinguishes between ‘permitted’ and ‘approved’ business, granting the former preferential treatment to bypass an MIC approval as opposed to the previous legislative framework, where any investment had to be greenlit by the MIC. Although it keeps in place some privileges for local businesses, the new law also ensures more of a level playing field for local and foreign businesses.

At the same time, it turns the page on the previous, automatic five-year tax break regime for approved investment to introduce more calibrated tax incentives targeting specific sectors, first and foremost labour-intensive manufacturing and infrastructure, as well as geographies. However, the exact detail of the new tax break regime will be known only once the full set of implementation rules are ready, supposedly by the end of the fiscal year in March 2017, which remains a cause of uncertainty among investors.

Another major uncertainty concerns the list of sectors that will be partially or fully restricted to foreign investment, with government authorities generally refraining from giving insights on this until the new rules are finalised.

Besides, the government is working on a new companies law that should further liberalise the economy by, among other things, opening up the local stock market to foreign investment and introducing a 35% foreign ownership threshold defining what constitutes a foreign invested company subject to foreign-investment regulations. Today, any foreign capital participation, no matter how little, is defined as a foreign investment company. The bill is expected to be discussed in the first half of 2017. 

In the right direction

“The new investment law is a great step forward,” says Giulia Zino, senior consultant at global risk consultancy firm Control Risks. “The companies law may be even more important, as the current version traces back to 1914. This alone shows how challenging the regulatory environment is. There are elements introduced in the past five years of civilian rule [2011-2016], others by the military junta [1961 to 2011], others during the British period [1824 to 1948]. All of these reforms have been streamlined by the government, but we have to be realistic on how long it will take to implement all this evenly across the country." 

While waiting for new rules, foreign investment is tailing off. Approved FDI amounted to $3.5bn in the first eight months of the fiscal year from April 2016 to December, down from $4.9bn in the same period of 2015, according to figures from the country's Directorate of Investment and Company Administration. If investment into manufacturing and transport and communications infrastructure showed resilience, growing by 22% and 2%, respectively, from a year earlier, regulatory uncertainty hampered investment in the power sector (-16.4% year on year) and completely dried up investment in oil and gas, from $2bn a year earlier. The two sectors combined account for almost two-thirds of the accumulated stock of foreign investment at the end of 2016.

At the same time, the end of trade sanctions sealed by the US in October will take time to produce tangible benefits because local financial institutions, which were heavily affected by sanctions and now represent the link between Myanmar and the global market, have a long way to go to upgrade their operations after years of isolation.

“For the financial sector as a whole, we have positive perspective, but we don’t see tremendous improvement at this moment,” says Win Lwin, managing director of Yangon-based KBZ Bank. “In the financial industry, everything is compliance. We are not used to it. Banks need much more compliance enforcement, they need to hire more professionals, set up financial crime units, transnational monitoring. Today we are still lacking all these things we were not familiar with before.”

Progress report

The volatility in the foreign exchange market is not helping either, with the kyat depreciating by 12.7% against the US dollar since the new government came to power, and foreign reserves are reportedly running low because of growing current account and fiscal deficits.

Despite these headaches, international observers remain confident the ongoing reforms will eventually gain traction in the medium term and add new momentum to the country’s development. Economic growth will remain at about 7% in 2017-18, above a regional average of about 6.2%, shored up by “a pick-up in foreign and domestic private investment”, the World Bank highlighted in its latest Global Economic Prospect in January.

“Myanmar is a country with so many challenges, but at the same time there is so much progress that has been done in the past five years, and that continues to be done,” says Control Risks’ Ms Zino.

“The challenge [for investors] is to stay on top of regulations that are changing all the time, some of which have got big gaps, loopholes, but also relate to everything that is operational, dealing with the infrastructure network, the banking sector, and so on. No matter how fast the progress is coming, it’s still going to take years [to fully materialise]. Overall it’s very promising, but it’s a difficult market, not for everybody.”